Budget: If pay restraint doesn't hold, the £22bn efficiency savings will be tough

Osborne’s new plans get rid of the so called ‘roller coaster’ profile of public spending for the next few years, but although it’s a smoother ride, it’s still a very scary drop.

The chancellor’s summer Budget statement had headline announcements on welfare reform and the living wage. Beyond the headlines, for the health service the policy contours of the next five years are taking shape.

The NHS Five Year Forward View has a new name: the Stevens plan.

‘The policy contours of the next five years are taking shape’

In line with the Conservative Party’s manifesto, the chancellor committed the government to the “Stevens plan”. He confirmed that “the NHS will receive – in addition to the £2bn we’ve already provided this year – a further £8bn by 2020” with the service needing to find £22bn of efficiency savings. This is the fixed point for the NHS going into this autumn’s spending review.

The Stevens plan follows on from the Nicholson challenge of the last Parliament.

The Treasury will be very reluctant to give any more to health and the messaging from government seems to be hardening.

The Budget explains why. The chancellor is committed to eliminating the annual deficit by 2019-20 and is planning a surplus of 0.5 per cent of GDP in 2020-21.

Don’t look down

His new plans get rid of the so called “roller coaster” profile of public spending for the next few years, but although it’s a smoother ride, it’s still a very scary drop.

The envelope for public sector day to day spending (RDEL in the jargon) is falling 3.1 per cent of GDP over this Parliament compared to a 3.3 per cent reduction in the last.

This means that in 2019-20 (the planned trough in public service funding) spending will be £120bn lower than at the peak in 2009-10.

‘The chancellor has left very little room for health to get much more’

This remains a truly massive contraction in spending: half done, half still to go.

Health is protected from these cuts and the chancellor has now added defence to his list of protected departments.

It leaves him with very little room for health to get much more, and the outlook for social care is bleak. It was notable that the chancellor said nothing about the timetable for implementing the Dilnot reforms and whether local government will get any help to meet the cost pressure which the living wage will add to social care, where so much of the workforce is very low paid.

Tough times

The budget fiscal forecasts chart also shows that while there is some scope for increased health funding in 2020-21, how that funding is phased in between now and the end of the decade will be critical.

Savings from the Carter review work and new models of care will all take time to materialise.

But the chancellor will want to keep additional funding in the early years to a minimum to spare other public services from even larger cuts.

The Institute for Fiscal Studies estimate that spending on public services which have not been ringfenced from cuts will need to be £19bn lower by 2019-20 – that’s a 13 per cent real terms reduction over four years.

The spending review this autumn will be tough - that, at least, is certain.

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